The Do’s and Don’ts of Marijuana Joint Ventures

It seems like most days I receive a call or an email from a client or potential client that wants to examine a marijuana joint venture (JV). Whether it’s a business arrangement between companies that already has been negotiated, or stage one of the deal process, marijuana JVs are all the rage, even though many people don’t understand what they are getting into. This post covers some the main do’s and don’ts of the marijuana JV.

What is a JV and why are so many companies looking to get into them? Counter to how they are often discussed, a JV isn’t an entity in the same way that a corporation or LLC or limited partnership is. A JV can take many forms but generally involves a contract between multiple business entities that involves some level of profit sharing for joint activities. As it turns out, financiers looking to capitalize off of the green rush often know nothing about producing or manufacturing cannabis. Conversely, a lot of our country’s best cannabis talent lacks both cash and know-how necessary to run a complex, highly-regulated cannabis business or ancillary company in a hugely competitive environment. Each side wants and needs a partner to cover some gaps, but the parties often are unwilling to share direct ownership in their businesses. So, we see some hasty marriages between multiple companies structured as JVs. This sharing of expertise and resources, along with strategic alliances for specific business purposes are the primary reason that most JVs exist. However, many companies wading into or already in the cannabis industry think a JV is the answer to pretty much every relationship. In reality, JVs require some specific circumstances to work.

JVs attract would-be dealmakers specifically because no ownership purchase, sale, or assignment has to take place between the interested companies. There is a lot that goes into an agreement where parties agree to an equity transfer. Securities filings, updates to company operating documents and cap tables, filings with state regulators, and other tedious projects await a company (and its attorney) anytime ownership is transferred. A JV avoids much of that and provides significant flexibility.

It is also worth noting that because of the new tax law, many cannabis businesses are choosing to form or be taxed as C-corporations. A JV between an operating company and a financier can provide some of the agreement flexibility that an LLC provides while allowing different parties to the JV to make different tax elections. With the fluid nature of cannabis laws and the creation of individual and insulated state markets, JVs appeal to many as a result.

The two (or more) companies coming together for a joint venture purpose are usually acting in their own best interests in the JV and not necessarily in the best interest of a single, unified entity. The individuals involved in negotiating a JV owe fiduciary duties to their own shareholders and members — not to the shareholders or members of their co-venturers. This dynamic has ramifications for the day-to-day performance of the parties, and it drives home the importance of negotiating the precise duties and obligations of the parties, using the JV agreement to efficiently allocate risk. If the parties do not make this allocation correctly, it is important to note that there is no statuary regime that delineates the standard relationship among the parties, as with corporations and LLCs. Negotiable provisions include governance of the joint venture itself, working capital, labor issues, and who bears the brunt of production or work product turn out.

As a result, finding your ideal JV partner can be a monumental task in cannabis where a lot of cannabis operators have never conducted business in a JV setting, let alone in a highly regulated environment. In turn, when looking for that JV partner in cannabis, whether you’re on the investor side or the operator side (or whatever side), your JV partner should be cognizant of and capable of compliance with the multitude of state regulation that now surrounds marijuana businesses (including residency, criminal record, and capital start-up mandates). The joint venturer should also understand marijuana federal enforcement priorities (or the lack thereof), be aware of the capital it will take support and sustain the JV, and be able to fully articulate their short and long-term goals for the JV.

With respect to state licensing, states will not issue a cannabis license to a JV: one or more of the co-venturers must hold the license, and the other entities will be engaged in some activity supporting that of the licensee(s). A JV just for cannabis licensure only really makes sense for parties that absolutely need market access and/or resources that they cannot otherwise get themselves or through their own investors. On the other hand, when it comes to the development of marijuana or marijuana ancillary intellectual property (IP), including for white labeling or brand houses, or to the development of certain marijuana based or related products that we wouldn’t otherwise see in the marketplace from a single company with limited resources, a joint ventures may be a good option. In such cases, the joint venture agreement should clearly spell out who has ultimate ownership and control of any IP developed by the venturers.

Lastly, for those cannabis operators contemplating a merger or acquisition down the line, a JV can make a future exit for the owners of any co-venturer difficult and clunky, unless the parties to the JV have not negotiated what to do if one of them wants to exit. Standard M & A deals include contract review by the acquiring party, and most JV contracts include clauses that allow termination of the deal if one side changes its ownership or sells off its assets. For the selling side, this can be extremely stressful if participation in the JV, and the resultant profits, are the primary reasons that buyers are looking at their businesses. If the JV isn’t clear about which party owns assets, additional challenges arise. Disputes around marijuana JVs are increasing where the parties have failed to identify, record, and enforce who will own and/or sell what JV assets, even in a partner-to-partner sale.

Marijuana JVs can work well in specific instances where the parties know what they are getting into and understand the risks that come with participating in a JV. If the only goal is to get a cannabis license, there are generally other types of deals that make more sense. When a JV is the right answer–e.g. for a specific projects, co-branded products, or other temporary business relationships–all parties are advised to carefully think through all of the possible ramifications before signing on the dotted line.

Editor’s Note: A version of this post previously ran in the author’s Above the Law column.

source https://www.cannalawblog.com/the-dos-and-donts-of-marijuana-joint-ventures/

BREAKING: Court Dismisses Federal Lawsuit to End Cannabis Prohibition

California’s Cannabis Regulations: Did They Get It Right?

The Lawsuit to End Cannabis Prohibition: Almost There

When you look at a map of states that have legalized cannabis use and sale, it is hard to believe that “marijuana” remains classified as a Schedule I drug under the federal Controlled Substances Act (CSA). A decisive majority of states and voters, across the political spectrum, believe the marijuana prohibition should end. The war on drugs has failed abjectly. And yet, here we are.

Over the years, many different parties have undertaken efforts to end prohibition. A dozen times or so, private parties have filed petitions with the Drug Enforcement Administration (DEA), per CSA protocol on rescheduling. The DEA has routinely denied each petition, or declined to accept it outright. The lone exception was a petition filed by the pharmaceutical manufacturer of Marinol, to move that synthetic cannabis drug from Schedule II to Schedule III. That one was granted

Other efforts have been made in the court system. These efforts are too numerous to detail at present, but they too have failed. Even a ruling by DEA’s own administrative law judge that cannabis should be reclassified was swatted away by the agency—and that was nearly 30 years ago. Nevertheless, a group of plaintiffs is at it again. It seems that today, almost fifty years after marijuana was placed on Schedule I of the CSA, people are less tolerant of prohibition than ever before.

The lawsuit at issue was filed by a group of five plaintiffs. The first is 12-year-old Alexis Bortell, who uses cannabis oil successfully to treat life-threatening seizures. Her family had to relocate to Colorado from Texas, because she could not acquire oil under Texas law. The second is 6-year-old Jagger Cotte, who treats with cannabis for Leigh Syndrome, a horrible, terminal neurological disorder. Third is former NFL linebacker Marvin Washington, who makes cannabis-based products for head trauma. Fourth is Iraq War veteran Jose Belen, who suffers from post-traumatic stress disorder and was given the option of “opioids or nothing” from the Veteran’s Administration. The final plaintiff is the Cannabis Cultural Association, a nonprofit seeking to reverse the racially disparate impact of cannabis prohibition. In lawyer terms, these are “sympathetic plaintiffs” all the way through.

The lawsuit targets marijuana’s status as a Schedule I drug under the CSA, and it asks the court to declare this status unconstitutional under the Due Process Clause of the Fifth Amendment, the Right to Travel, and the Commerce Clause. It also seeks a permanent injunction restraining the federal government from enforcing the CSA as relates to marijuana, and other relief. The named defendants here include none other than Attorney General Jeff Sessions, the Department of Justice, DEA, and the United States itself. Earlier in the litigation, plaintiffs sought a temporary restraining order against the feds with respect to enforcement of the CSA as to cannabis, but that motion was denied.

Notwithstanding that early setback, the lawsuit itself is well conceived and expertly written. It was filed in District Court, which is an unusual venue and interesting gambit by the plaintiffs. Typically, challenges to marijuana’s status under the CSA have been brought in administrative fora, where venue is not in dispute. Here, however, plaintiffs argue that the administrative process has proven to be so dysfunctional—and plaintiffs’ requests so urgent—that district court is a viable alternative. Thus, much of the oral arguments presented recently by both sides centered around whether the plaintiffs’ case could continue. If the judge can find a creative justification for that to occur, he seems to be leaning strongly toward plaintiffs on the merits.

If the plaintiffs somehow prevail, Sessions et al. would likely appeal the ruling to the U.S. Court of Appeals for the Second Circuit. Unfortunately, that court has previously held that marijuana’s Schedule I status is constitutional. In addition, another U.S. District Court judge in New York recently rejected a constitutional challenge to the Schedule I status of marijuana, albeit in a criminal matter. In the big picture, the odds are somewhat long for this particular case.

Even if plaintiffs do not prevail, their efforts have received a ton of valuable press from the outset. The fact that taxpayer dollars are being spent to battle a 12-year-old epileptic girl, a dying child, a traumatized veteran, and others, is a terrible look for the feds. Our strong hope is that this lawsuit and the relentlessly rising tide of public opinion will force Congress to finally act. Voters are no longer interested in prohibition, which is morally and legally indefensible. It’s time for a change.

source https://www.cannalawblog.com/the-lawsuit-to-end-cannabis-prohibition/

Paying Oregon Cannabis Farm Workers

Revisiting the Basics of Federal Trademarks in the Cannabis Industry

On Friday, I had the privilege of speaking on a panel at American University Washington College of Law’s Intellectual Property Symposium in Washington D.C., which addressed the obstacles of obtaining and enforcing IP rights in the cannabis industry. Many of the questions asked were ones I’ve been working through for the last several years, so I thought it would be helpful to address them in this post, and to revisit some of the basic issues my cannabis clients face in protecting their brand assets.

First, here are a number of posts I’ve written on cannabis IP and trademarks that cover many of the issues we discussed:

• Cannabis Trademark Basics: What Makes a Mark Weak?
• Cannabis Trademarks: Immoral and Scandalous Matter?
• Cannabis Apps: Protecting Your Brand On Mobile Platforms
• Cannabis Branding: Choosing a Mark that Won’t Get You Sued
• Cannabis IP Licensing: It’s Complicated

The most pressing topic, of course, was how we should advise our clients to protect their brand assets, given the unique legal status of cannabis. As far as brand protection goes, federal trademarks are the most effective device for ensuring that consumers are able to identify your goods and services, and for ensuring that third parties are unable to copy your mark. A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others.

On one hand, owners of successful brands want to rest assured that other parties will not be able to exploit their brand without the brand-owner’s permission. But on the other hand, trademarks are extremely important from a consumer protection standpoint. From a public policy perspective, we want consumers to know where the goods and services they purchase are coming from, and to make informed purchasing decisions based on factors like quality and safety. The primary way for consumers to distinguish the goods of one company from the goods of another is via branding.

There are three ways in which a brand owner can establish trademark rights:

1. By using the mark in connection with their goods or services (legally) in commerce (which establishes common law trademark rights);
2. By registering the mark with the United States Patent and Trademark Office (USPTO) (which establishes more robust, statutory rights); and
3. By registering the mark with an appropriate state trademark registry.

Registering a trademark with the USPTO is the best way to protect one’s mark, but, as we’ve discussed before, because cannabis is still illegal under federal law, and because one requirement for registration of a federal trademark is that the applicant has made “legal use” of the mark in commerce, the USPTO has continually refused to register marks for use on cannabis and any other goods and services that violate the Controlled Substances Act (CSA). Under the CSA, it is unlawful to sell, offer for sale, or use any facility of interstate commerce to transport drug paraphernalia, i.e., “any equipment, product, or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance, possession of which is unlawful under the CSA.” These attempted registrations will almost always fail.

So how do cannabis businesses go about protecting their brands when federal trademark protection is unavailable to marks used on federally illegal goods and services? One way is to obtain registration for ancillary goods or services that do not violate the CSA. For example, if you manufacture a cannabis-infused beverage AND you produce and sell a non-infused version of that beverage, it may be possible to secure a federal trademark registration that will cover your non-infused beverages. The strategy here is to then assert a “likelihood of confusion” argument against any would-be infringers in order to prevent them from using your mark.

Another strategy we advise our clients to use is the state trademark registration process. Though the protection afforded by a state trademark is geographically limited to the state of the registration, at best, state trademarks tend to provide more extensive geographic protection and legal remedies than common law rights. Common law rights can be limited to the geographic area in which you are using the mark, meaning that if you only do business in San Francisco, your common law trademark rights could only protect you within the city of San Francisco. And if you want to avail yourself of the statutory remedies available to trademark owners in infringement cases, you will need to register your mark.

Regardless of whether you file for federal or state trademark protection, or whether you opt to develop a brand without ever registering anything, it is critical to ensure that your brand does not infringe on the rights of any third party. A mark does not need to be exactly the same as another mark in order to infringe that mark: the standard is “confusing similarity,” which is comprised of multiple factors and is highly subjective. This is why, prior to investing in brand development, consulting a trademark attorney and obtaining a comprehensive search report on your proposed mark is key. A thorough search is necessary to establish that your brand or logo will not infringe any other trademark, whether registered or not.

As we’ve stated before, the federal illegality of cannabis makes brand protection and trademark law particularly complex in this industry. Navigating state and federal trademark laws to protect your mark is possible, but requires some ingenuity.

source https://www.cannalawblog.com/revisiting-the-basics-of-federal-trademarks-in-the-cannabis-industry/

Open Cannabis Project: The Fight to Get Marijuana Patents Right

As we’ve discussed before on this blog, cannabis can be and is being patented. It is important to remember that patents are a balance between competing social values. In classical legal theory, patents exist to encourage innovation by offering innovators a limited monopoly in return for making inventions, and eventually releasing them to the public. Although the common law disfavors restraints on trade such as patents, the prevailing theory is that granting a partial monopoly is justified by the social benefit of innovation. This is known as the contract model of patents. Whether this model really produces net social utility in particular cases, or ever, is hotly debated.

What isn’t debated is that the contract model fails if what is patented is not new. One of the biggest challenges of our patent system is determining what is “new enough” to reward with a patent. In general, the patent system examines novelty by comparing a claimed invention to existing products (known as the “prior art”) that are in the same or related fields. (In some patents, an invention must also be “non-obvious” in light of prior art. I don’t address obviousness here.) The practical problem is searching the historical haystack for the needle of relevant prior art. Searching the text of patents is relatively easy. But most of the world is not patented, and is more difficult to search; e.g., plants and other living things are not text-searchable. So how do we keep living prior art, such as cannabis strains, available to the public and not covered by the patent monopoly?

This question is being addressed by an Oregon non-profit, the Open Cannabis Project (“OCP”) (full disclosure: I am a legal advisor to the OCP). According to the OCP:

Cannabis is in danger of going the way the rest of agriculture has gone: toward monoculture, centralization, and restrictive patenting…The growing wave of legalization – and the intellectual property competition that comes with it – may have the unintended consequence of narrowing and restricting [cannabis] diversity….Open Cannabis Project (OCP) was established by industry leaders to resist these forces and to protect the genetic diversity of the Cannabis plant as well as the economic diversity of the cannabis industry….

To keep existing cannabis strains freely available to the public, the OCP is building an open-source repository of genetic data. This repository will serve as a source of prior art, useful to the U.S. Patent and Trademark Office (“Patent Office”) and to the cannabis industry. Several labs have already pledged to contribute existing data to the repository, which is now being stored at the National Center for Biotechnology Information. The OCP’s aim is to have a comprehensive set of genetic data for all cannabis varieties that are either naturally occurring or which have been previously available to the public. Either one of these conditions renders such varieties patentable.

The OCP holds great promise in its goal of keeping existing cannabis strains from coming under the control of one commercial entity or another. Some questions remain, however. For example, there is sometimes a mismatch between what the Patent Office considers when it reviews plant novelty, and what is available in genetic data. Hopefully the OCP and other cannabis industry players will be able to work with the Patent Office and perhaps Congress to address this and other concerns. Given the availability of cannabis patents and the size of the industry, there is a lot at stake.

source https://www.cannalawblog.com/open-cannabis-project-and-the/

Washington Marijuana: State May Allow CBD Additives

The Washington State House of Representatives is considering  House Bill 2334, which would allow licensed marijuana producers and processors to use cannabidiol (CBD) from a source not licensed by the Washington State Liquor and Cannabis Board (LCB). The bill defines a “CBD product” as “any product containing or consisting of cannabidiol” and would permit the use of CBD products from unlicensed sources so long as the CBD product has a THC level of 0.3 percent or less on a dry weight basis and has been lab tested.

Washington’s regulated cannabis market is a closed loop that works on the principle that no marijuana comes in and none goes out. Everything sold in a licensed retail store is grown by licensed producer and processed into products like oils and edible by a licensed processor. If a licensee is caught bringing in marijuana from an outside source, the LCB will cancel the license.

HB 2234 would have the most impact on processors who could add CBD to products such as marijuana oils, candies, capsules, and other infused products. Though HB 2334 is still far from being law, processors in Washington have flirted with the idea of using unlicensed CBD to create products with higher CBD concentrations. Processors who choose to enrich products with unlicensed CBD do so at their own risk.

The legal basis for claiming that using CBD from cannabis outside of Washington’s regulated market is based on the idea that not all cannabis is in fact “marijuana” and that products containing CBD derived from “Industrial Hemp” or from portions of the cannabis plant that are excluded from the federal Controlled Substances Act’s (CSA) definition of “marijuana” are legal under federal law.

Section 7606 of the 2014 US Farm Bill  (the Farm Bill) creates the framework for the legal the cultivation of “Industrial Hemp”, which is defined as cannabis with a THC concentration of less than 0.3% on a dry weight basis. The Farm Bill allows states to enact pilot programs for hemp research purposes. Washington has such a program, though it is underfunded. Hemp that is cultivated in compliance with a state’s pilot program is legal pursuant to the Farm Bill, although the sale of any products derived from this research is not explicitly allowed.

Last year, the state legislature required that the LCB study the viability of allowing processors to use hemp cultivated by licensed hemp farmers. See RCW 15.120.060. It’s also possible that a processor could use CBD derived from a hemp cultivator in another state that has implemented an Industrial Hemp program under the Farm Bill, but the Drug Enforcement Administration (DEA) has issued a Statement of Principle claiming that the interstate transfer of Industrial Hemp is outside the scope of the Farm Bill and therefore unlawful.

Processors may also claim that if CBD is derived from the mature stalks of the cannabis plant, it is not prohibited by the CSA. The CSA’s definition of marijuana “does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.” 21 USC §802(16). In the early 2000’s, two cases out of the Ninth Circuit, Hemp Indus. Ass’n v. DEA, 357 F.3d 1012 (9th Cir. Cal. 2004) and Hemp Indus. Ass’n v. DEA, 333 F.3d 1082 (9th Cir. 2003) clarified that the DEA could not regulate hemp products merely because they contained trace amounts of THC. According to these rulings, some portions of the cannabis plant are explicitly outside the scope of the CSA. Thus, the court ruled that the DEA was not permitted to expand the scope of the CSA to encompass all parts the cannabis plant.

Because it was illegal to grow hemp in the United States until 2014, the Ninth Circuit decisions only applied to hemp imported from other countries. For CBD sourced from domestically grown hemp, today’s processors would need to know for certain from which part of the cannabis plant the CBD was derived to have a credible argument. If the CBD were sourced from any portion other than the mature stalks or seeds incapable of germination, then the product would be derived from marijuana and the processor could lose its license. There is also a question of whether a meaningful amount of CBD can even be extracted from mature stalks and seeds incapable of germination.

Processors who are using CBD additives do so at their own peril. Neither of the above legal theories provides much security as the licensee is counting on the fact that the LCB will accept this complex legal analysis and determine that the licensee is not using unlicensed cannabis. HB 2334 would provide some clarity and create a legitimate method to use unlicensed CBD. HB 2334 could also create an incentive for more farmers to participate in Washington’s fledgling hemp market. Finally, the bill would likely result in an increase in high-CBD products that some consumers–especially medical cannabis users–feel Washington’s market lacks.

For the bill to become law, it would have to pass the House, pass the Senate, and be signed by the Governor. It’s still too early to tell with HB 2334 will make it, but it’s worth keeping an eye on for now.

source https://www.cannalawblog.com/washington-marijuana-state-may-allow-cbd-additives/

Oregon Cannabis: OLCC Systems Audit Gets Mixed Results

California Cannabis Countdown: The City of San Luis Obispo

More Action on California’s Cannabis Event Permit Rules

What’s On Your Label, Part 2: California Cannabis Packaging and Labeling for “New” Products

Will California Protect Off-Work Medical Marijuana Use?

Cannabis Startups 101: Raising Funds Under Rule 506(c)

A growing number of startups in the cannabis space are engaging brokers and online platforms to assist in their fundraising. This makes sense: as we’ve written previously, most investors (particularly institutional capital) are staying on the sidelines and taking a wait-and-see approach to the cannabis industry. Thus, cannabis startups will always target a smaller, more dispersed, more specialized investor base, and going through experts is a logical way to reach them. Note that 506(c) is one of the relatively new options for company financing, implemented as part of the JOBS Act of 2012. It allows for companies to engage in a more public “general solicitation”—but with strings attached, as we’ll detail below.

From a securities law perspective, the engagement of a broker-dealer or online platform converts the offering exemption from the ever-popular 506(b) offering to a 506(c) offering – changing this one letter has a number of significant consequences:

1 – You must ensure that the broker-dealer is registered, or else.

Section 3(a)(4)(A) of the Securities Act generally defines a “broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.” This broad definition includes any “finder,” “fundraising consultant,” or anyone else receiving any transaction-based bonus or commission in return for introducing or engaging an investor. You should always consult your securities counsel when a third party is assisting the company on fundraising. Once it is established whether broker-dealer registration is required, FINRA provides an online Broker-Dealer Check. The penalties for using an unregistered broker-dealer are extremely harsh, so it’s always wise to err on the side of caution.

2 – You are limited to accredited investors, and you must take additional steps to confirm an investor’s accredited status.

In a 506(b) offering companies have the flexibility to raise from an unlimited number of accredited investors, as well as up to 35 unaccredited investors. Only around 2% of the US population would meet the accredited investor conditions (in short: at least $1 million of assets not including one’s home, or a recurring annual income of at least $200,000 (or $300,000 if married)). The loss of the unaccredited investor option may eliminate some of the classic “friends and family” seed investors, that write smaller—but often critical—checks to keep the company afloat in the early going.

Further, raising under 506(c) puts a higher burden on the company to complete its own diligence to confirm an investor’s accredited status. Under 506(b) you can essentially take the investor’s word for it. The SEC has laid out the types of records one would examine under a “principles-based verification method” and they include the investor’s bank statements, brokerage statements and records of securities holdings, tax returns and tax assessments or appraisal reports prepared by third-parties. Looking at these records may not seem like such a big deal, but the hurdle of developing this method and implementing for each investor can be a significant undertaking for startup company.

3 – You can engage in a general solicitation under 506(c), but with greater visibility comes…greater visibility.

The advantage of expanding your potential investor base beyond those with whom you have a “substantial pre-existing relationship” (which is required under 506(b)) may seem to open a world of possibilities. But putting your company out in the open may have drawbacks: any proprietary info in your investor materials will get passed around, you may pick up shareholders that cause you problems down the line, you may attract attention from the not-in-my-backyard types, and some investors prefer their cannabis investments to keep a lower profile.

Finally, it bears repeating: seek an experienced corporate and securities attorney. With these choices you need principled and consistent counsel, because there is a final consideration: once you’ve engaged a broker-dealer or otherwise engaged in a general solicitation, you are committed for the entirety of your financing round. Any unaccredited “friends and family” are out—they can’t write checks under any circumstances—and you cannot revert to the more relaxed requirements of 506(b).

source https://www.cannalawblog.com/cannabis-startups-101-raising-funds-under-rule-506c/

Blockchain and California Cannabis: From Seed to Sale

We have previously discussed blockchain technology and the effect it can have on the cannabis industry here and here. This post serves as a more detailed analysis of how blockchain can and may disrupt the tracking of cannabis from seed to sale, specifically within the new California adult use market.

Currently, cannabis businesses are spending significant amounts of money to implement track and trace systems compatible with Franwell’s Metrc. Metrc is a government-designed software that many states have elected to use, including California, that allows regulators to ensure that cannabis products are not being diverted to illegal markets. Cannabis products are given a radio frequency identification (“RFID”) tag, which licensees along the supply chain must input into their systems. This allows regulators to track the chain of custody of marijuana products. Under this system, however, licensees and regulators spend significant time ensuring compliant transfers.

Enter blockchain. In its simplest form, blockchain is a dispersed ledger. Transactions, or “blocks,” are added in a linear fashion, or “chain”, after they have been verified by other members of the blockchain as valid. All transactions on the chain are trackable to the initial entry. A blockchain platform can have various levels of supply chain information gathering, such as record keeping, tracking, assigning verifications, linking products together and sharing information.

Using blockchain technology, cultivators can input details about each crop: e.g., the date the flower was harvested, pesticide levels throughout the growth cycle, and information about cross-pollinated plants. The data can be stored and verified via blockchain, and instantaneously shared with all parties on the blockchain platform. These parties can be other members of the cultivation team, cultivators in different facilities, potential retailers or producers, and even end-use consumers. This data will travel with the flower from seed to sale.

When the product is ready for pick-up from a grow site, the blockchain platform can verify that a distributor is licensed. Implementing blockchain can therefore prevent unlicensed distributors with fabricated paperwork from stealing goods. The platform will also maintain all records of a transaction or series of transactions: e.g. shipping manifests, receipts, purchase orders, lab results, etc. Blockchain can also help ensure that products are being properly labeled. When a label is created, a photograph or file of the label can be uploaded to the blockchain. Members of the blockchain can verify that the label is correct before it reaches the product.

Because all information recorded in blockchain is verifiable by other members on the platform, blockchain will remove the need for tedious paperwork at each step in the supply chain. Cannabis will be able to move freely from licensee to licensee without any added hassle. Regulators will gain a streamlined audit tool, and customers will be able to ensure that they are only getting the best and safest products. Ultimately, blockchain can improve the overall integrity of the track and trace system, and minimize the time it takes for the product to get from seed to sale.

The million dollar question with all of this is whether and when blockchain will burst through and finally become mainstream enough for adoption by a state regulatory body, like California in the case of cannabis. There are a range of opinions on the inevitability and timing of blockchain (for just a few of the many examples, see here, here and here). In our view, blockchain and cannabis are a perfect marriage of emerging trends. We will continue to partner with individuals and businesses interested in this technology, and we foresee a bright future for blockchain and cannabis once the implementation and educational hurdles are cleared. Hopefully, that happens in a few years at most. In the meantime, California businesses and regulators will have to muddle along with Franwell’s Metrc product.

source https://www.cannalawblog.com/blockchain-and-california-cannabis-from-seed-to-sale/

Oregon Cannabis: OLCC Clarifies Shared Processing Arrangements

Landlords, Tenants and Cannabis Loans

California Cannabis Countdown: Culver City (Updated!)

Cannabis Litigation Webinar: The Video

In case you missed our January webinar on cannabis litigation, please find it below.

For a replay of the other webinars in our lunch-time marijuana series, please go here and here.

Enjoy!

 

source https://www.cannalawblog.com/cannabis-litigation-webinar-the-video/

Regulatory Audits of Your Cannabis Business: Plan Ahead!

Much Ado About RICO and Cannabis Part 5: Multi-State Update

We’ve previously discussed several civil cases in Oregon where private parties sought to shut down cannabis grow operations under RICO (Racketeer Influenced and Corrupt Organizations Act), claiming that the grow was part of a criminal conspiracy that would drive down property values (see our RICO series here, here, here and here).

Today, we have an update on two marijuana RICO cases elsewhere the country, one in Colorado, and the other in Massachusetts.

Colorado: In a previous post, we discussed Safe Streets Alliance v. Alternative Holistic Healing, LLC, a case from Colorado. This case is notable because the 10^th Circuit Court of Appeals has already issued an opinion addressing several key legal issues, giving the litigants the go-ahead to try their case. In dicta, the 10th Circuit noted that at trial, it was possible that a judge or jury would determine that the plaintiff’s land was actually more valuable because of its suitability for cannabis cultivation. Although the 10^th Circuit’s opinion only technically applies in the states of Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, other trial and appellate courts will consider the opinion as “persuasive” authority, in other RICO cases.

This case is now scheduled for trial beginning in late August 2018. Assuming this case does not settle, and regardless of the verdict, the result will likely have far-reaching impact on potential RICO actions nationwide. As to the trial itself, many issue will be raised, from admissibility of evidence to expert testimony. One or more of those issues will likely be appealed again to the 10^th Circuit. Future litigants are likely to use the trial record as a guide to bringing and defending these RICO cases.

Massachusetts: In Crimson Galeria v. Healthy Pharms, the plaintiff, a Harvard Square property owner, claims that Healthy Pharms, a neighbor and prospective cannabis operation, will diminish the value of plaintiffs’ property. As claimed in the lawsuit, “amongst other matters, marijuana businesses make bad neighbors, which include without limitation, emitting pungent odors, attracting undesirable visitors, increasing criminal activity, driving down property values, and limiting the rental of premises.” As with the Safe Streets case, one wonders whether suitability for cannabis sale actually increases the value of the land.

The lawsuit also alleges that local and state government agencies, including the state Department of Public Health and the city of Cambridge are “facilitating and encouraging violations of the federal drug laws by licensing and permitting marijuana businesses.” One of the plaintiffs’ claims is that the federal Controlled Substance Act (CSA) “preempts the practice of state and local officials in Massachusetts of issuing licenses to operate marijuana businesses.” The 10^th Circuit addressed similar preemption arguments, ultimately finding that the plaintiffs had no claims on which relief could be granted. But Massachusetts is in the 1^st Circuit Court of Appeals, and the 1^st Circuit judges will not be bound by the Safe Streets opinion (although they almost certainly will consider it).

It is at least theoretically possible that the 1^st Circuit could find differently than the 10^th Circuit, causing a circuit split that would have to be decided by the U.S. Supreme Court. That would be a doozy.

source https://www.cannalawblog.com/much-ado-about-rico-and-cannabis-part-5-multi-state-update/

California Cannabis Events: Coming to a City Near You?

Santa Barbara County Nears Final Commercial Cannabis Regulations

Red Herring Alert: Should California Have a Public Cannabis Bank?

Much Ado About RICO and Cannabis, Part 4

What if You Break the Rules? Cannabis Administrative Litigation in Oregon

Oregon Cannabis Laws: The 2018 Draft Bills Are Here

Santa Cruz County: Update for Non-Retail Commercial Cannabis Businesses

Last week, Santa Cruz County hosted two public meetings to discuss the County’s path toward regulating commercial cannabis cultivation, manufacturing and distribution within the County. The County presented a good deal of information for those interested in pursuing these non-retail commercial cannabis licenses that we’ll outline in this post.

One of the most significant proposals is a recommendation that project-level environmental review be required in lieu of Board certification of the current draft Environmental Impact Review, which provided exhaustive analysis of the existing and proposed commercial cannabis industry in Santa Cruz County. This means that each future non-retail commercial cannabis license would be considered a separate project, and would be subject to discretionary land use permit review and associated environmental review based on site-specific conditions.

The County also presented a proposed final Santa Cruz County Code (SCCC) 7.128, as well as amendments to SCCC 13.10 which will serve to regulate all non-retail cannabis cultivation, manufacturing and distribution in Santa Cruz County. SCCC 7.128 will establish operational requirements for cannabis businesses as well as a cannabis licensing program. And the amendments to SCCC 13.10 will establish zoning restrictions and land use permitting requirements for cannabis businesses.

The Planning Commission will meet again on February 28^th to review proposed mitigation, monitoring and reporting measures in the form of a Best Management and Operational Practices Plan (BMOP) as well as an enforcement plan. According to the County, the BMOP will address issues including use of rodenticides, grading limitations, fencing requirements, neighborhood compatibility (lighting, site screening, etc.), and biological surveys among other topics.

The following is an overview of some of the important changes to these proposed ordinances:

• New canopy limits;
• Co-location of licensees will be possible in all zones subject to certain limits and CLO official approval;
• Master planned facilities will be possible in all zones subject to certain limits and CLO official approval;
• There will be limits to activity on Timber Production zoned properties, including no more than 0.25 acres of new expansion for any cannabis-related development, land clearing or grading.

For manufacturers, the County will offer three licenses types:

• Class 1: Infusions (no extractions of any kind);
• Class 2: Non-volatile extractions; and
• Class 3: Volatile extractions.

And the following is an overview of some of the proposed changes to the SCCC 13.10 zoning ordinance:

• All cannabis activity will require a discretionary permit in addition to a license (findings must be made and conditions of approval may be attached, and permits will be processed at the same time as applications).
• Wherever possible, the permit process for cannabis activity mirrors the process for similar types of non-cannabis activities.
• The activity allowed and the type of permit required depends on 1) the zone district; 2) the type and scale of the activity; and 3) whether the property is urban or rural, and in or outside the Coastal zone plus a one mile buffer.

We will be following developments in Santa Cruz County closely, and expect to have more information following the Planning Commission’s meeting on February 28^th. Stay tuned.

source https://www.cannalawblog.com/santa-cruz-county-update-for-non-retail-commercial-cannabis-businesses/

Do You Actually Own Your Cannabis Business?

California Cannabis Countdown: City of Redding

Washington Attorney General Prepares to Fight Trump on Cannabis

What You Need to Know Now to Get Your California Cannabis License: The Video

In case you missed our webinar on getting a license in compliance with California’s Medicinal and Adult-Use Regulation and Safety Act (“MAUCRSA”), the video replay is below.

Check back next week for the recording of our cannabis litigation webinar, the final webinar in our lunch-time webinar series.

And for a re-run of our recent webinar on webinar on the “Rights, Opportunities, and Responsibilities of Municipalities Regulating Cannabis”, go here.

Enjoy!

source https://www.cannalawblog.com/what-you-need-to-know-now-to-get-your-california-cannabis-license-the-video/

What’s On Your Label, Part 1: California Cannabis Packaging and Labeling for Transition Products

Super Bowl LII: Will We See Cannabis Commercials?

California Sees First Major Legal Challenge to Cannabis Cultivation Regulations

Did You Just Hire a Cannabis Employee or an Independent Contractor?

California Cannabis Legalization: CEQA and the Limitations of Local Zoning Authority

California Cannabis Countdown: The City of San Diego

New Oregon Cannabis Rules: Part 4 – Industrial Hemp

In the three previous entires to this series (here, here, and here), we have discussed the major changes in the packet of rules amendments that the OLCC adopted at the end of 2017. Those changes cover promotional events, lender disclosures, and canopy size changes for marijuana grows. Today, we want to talk about the new rules for industrial hemp.

Industrial hemp regulation has been going through a series of rapid shifts since 2016, when the Oregon legislature adopted a two-tier system that allowed for the registration of industrial hemp growers (producers) and handlers (processors). At the time, only hemp handlers could sell industrial hemp products. This changed last year, when Governor Kate Brown signed into law SB 1015, which allows industrial hemp to enter into the recreational cannabis supply line.

Just before the new year, the OLCC adopted amendments to its administrative rules on cannabis that implemented SB 1015, providing much needed guidance on the new hemp regime. First and foremost, the term “industrial hemp” refers to any cannabis plants with a THC concentration below 0.3 percent, mirroring the definition under federal law. Hemp growers and handlers can apply to the OLCC for an industrial hemp certificate ($500 per year, plus a $250 application fee) to transfer hemp to recreational processors, and handlers can also receive a certificate to transfer their hemp concentrates and hemp extracts to recreational processors.

In turn, recreational processors can apply for a special “endorsement” that will allow them to accept hemp and hemp products from the handlers and growers, create hemp concentrates or extracts with a THC concentration below 5 percent, incorporate hemp concentrates or extracts into “marijuana items,” and sell those products to other OLCC processors, wholesalers, and retailers. OLCC retailers can then turn around and sell these hemp-based products to Oregon consumers.

None of this answers the question that we receive most often from industrial hemp producers: “Can I sell my industrial hemp products outside of Oregon?” It goes without saying that OLCC retailers must sell locally, so any hemp products transferred into the recreational supply chain can only be sold in Oregon. Hemp outside of the recreational chain is regulated by the Oregon Department of Agriculture (ODA). The ODA’s rules are surprisingly wide open when it comes to the sale of industrial hemp products. Under OAR 603-048-0100, a hemp handler can sell hemp products “to any person.” The ODA’s rules make no reference to whether that sale must occur in Oregon.

While interstate sales of hemp products may be legal in Oregon in certain circumstances, federal law on the issue is anything but clear. The DEA has taken the position that any concentrate or extract derived from the flower, leaves, or resin of any plant of the cannabis family, regardless of relative THC concentration, is a prohibited Schedule I drug. In contrast, the mature stalks of such a plant and fiber from such stalks, as well as oils or cake derived from hemp seeds or stalks are not included in the federal definition of marijuana, and are not subject to federal prohibition. There is currently a lawsuit pending before the Ninth Circuit Court of Appeals that challenges the DEA’s position, and we can hope that the court will provide a bit of guidance in this area. For now, we still advise our clients to keep their products in Oregon.

Note: Portions of this post were originally published in the Portland Mercury and are republished here with permission.

source https://www.cannalawblog.com/new-oregon-cannabis-rules-part-4-industrial-hemp/